2)Arlene and Bill are married and own a house. They have lived in the house and

Question

2)Arlene and Bill are married and own a house. They have lived in the house and used it as their principal place of residence for 3 out of the last 5 years. For the first 2 years they owned the house they rented it and reported $25,000 of taxable income. However, they took depreciation deductions of $13,000 in total over the two years. Their basis in the house was $325,000 and they sold the house for $456,000. They purchase a new home for $400,000. How much taxable income will they recognize on the sale of the house?

Explanation / Answer

Amount Realized from Sales = $456,000,

Real Value of Home = Value of Home + Income from Houes property - Deductions = $325,000 + $25,000 - $13,000 = $337,000

Net Gain from Sale = $456,000 - $337,000 = $119,000

Now purchase of New house with $400,000.

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